Related Content

‘‘The foreign exchange market is perhaps another area in which investors should take care,’’ Mr Stevens said today in the text of a speech in Sydney. ‘‘It seems quite likely that at some point in the future the Australian dollar will be materially lower than it is today.’’

The RBA has left the cash rate unchanged at a record-low 2.5 per cent for the past two meetings as it gauges the impact of earlier reductions on the economy and the outlook for global growth. Mr Stevens said China’s expansion remains ‘‘robust’’ and the US appears to be ‘‘healing,’’ while noting the greenback had eased after the Federal Reserve opted against beginning a tapering of bond purchases.

Advertisement

The Australian dollar fell about a third of a US cent in reaction to his comments, hitting a session low of 95.41 US cents.

The local currency has climbed almost 8 per cent against the US dollar in the last couple of months, in large part due to the Federal Reserve's decision to delay the tapering of its asset purchasing program.

‘‘It would be a mistake to relax for very long in the face of this delay. Surely the ’taper’ will come.’’ he told a Citigroup conference. ‘‘For some countries, including Australia, the beginning of a return to something resembling more normal conditions, in at least one major advanced country, would lessen some of the difficulties we face in our own policy choices.’’

The RBA is balancing record-low rates that are driving up housing prices against renewed strength in the Australian dollar -- among the best performers of group of 10 currencies since late August - that is constraining industries exposed to exports.

Housing rise

Mr Stevens said today that ‘‘some’’ rise in housing prices is a normal response to lower rates and will provide incentive for residential construction, adding that given credit growth is between 4 per cent and 5 per cent per annum at the moment, it is ‘‘a little too early to signal great concern’’ over price gains.

"In the interim, some commentators have taken the view that the property market dynamics are worrying. My own view, thus far, has been that some rise in housing prices is part of the normal cyclical dynamic, that it improves the incentive to build, and that a price rise reversing an earlier decline probably isn't something to complain about too quickly," said Mr Stevens.

"Moreover, credit growth, at between 4 and 5 per cent per annum to households, and less than that for business, does not suggest that rising leverage is so far feeding the price rise. Hence it has been a little too early to signal great concern."

The caveats, he said, is that credit growth may pick up over the period ahead and and borrowing is increasing ‘‘quite quickly’’ in some pockets of the country.

‘‘Investor participation in housing in Sydney, in particular, is becoming noticeably stronger,’’ he said. ‘‘Over the past year, the rate of finance approvals for this purpose has increased by 40 per cent.’’

Traders are pricing in little chance of a rate reduction by the central bank this year, according to swaps data compiled by Bloomberg.

Mr Stevens also noted today that the strength of the exchange rate in recent years also had a significant impact on the central bank’s balance sheet. Treasurer Joe Hockey announced last week the government will inject $8.8 billion into the central bank’s depleted reserve fund.

‘‘The effect of this is that instead of it taking many years to rebuild the capital, it will occur in the current year,’’ Mr Stevens said. ‘‘This results in a stronger balance sheet on average, and makes it likely that a regular flow of dividends to the Commonwealth can be resumed at a much earlier date than would otherwise have been the case.’’